Tried answering questions about long-term interest rates!
Q: Which interest rate is referred to by long-term interest rates? What is important?
A: First, generally long-term interest rates are often referred to as the “10-year government bond yield.” I would like to summarize long-term interest rates.
1) What are long-term interest rates?
In many countries, the yield on 10-year government bonds is what is called long-term interest rates. When referring to government bonds, we use “bond price” and “bond yield.”
・Bond price → Popularity high = price rises
Popularity low = price falls
In terms of price, it is easier to understand if you imagine auctions: when there is strong demand, price rises; when there is weak demand, price falls.
・Bond yield → Popularity high = yield falls
Popularity low = yield rises
Yield can be thought of as interest. Bonds issued by countries with high creditworthiness (popular countries) tend to have lower yields, while those with low creditworthiness (unpopular countries) tend to have higher yields.
Thus, there is an inverse relationship between “price” and “yield.”
Regarding government bonds, I have summarized more on the following, so please read together.
About US Treasury redemption and interest payments
2) Long-term interest rates reflect a country’s creditworthiness
As mentioned above, long-term yields rise or fall according to popularity/creditworthiness.
For example, if Japan and North Korea had the same 10-year government bond yield, which one would you buy?
Naturally, since North Korea carries a risk of not getting payoff, you would buy Japanese government bonds. However, if Japan’s yield and North Korea’s yield differed by 100 times, some might buy North Korea’s bonds. It’s about the balance of risk and return. If a country has high creditworthiness, it can attract buyers even with lower yields. If a country’s creditworthiness is low, it must offer higher yields to attract buyers. Therefore, yields reflect a country’s creditworthiness.
Yield can be said to reflect a country’s creditworthiness.
So, what does a drop in creditworthiness entail? Recession, terrorism, political instability, disasters, armed conflict, war, etc., events that cast doubt on government bond repayment cause creditworthiness to drop.
Conversely, when you look at long-term yield and it rises, that indicates creditworthiness is dropping. You can say creditworthiness is deteriorating due to such events.
By watching long-term interest rates, you can quickly detect downturns, terrorism, political instability, disasters, armed conflict, and wars.
3) Long-term interest rates are a basis for comparison
As described, long-term interest rates reflect a country’s creditworthiness. However, looking at the creditworthiness of a single country alone doesn’t tell you whether it is high or low.
Hence, we compare with other countries. A common reference is the “Japan-US interest rate differential.”
The Japan-US interest rate differential is the difference between Japan’s long-term interest rate (10-year Japanese bond yield) and the United States’ long-term rate (10-year US Treasury yield).
When the United States’ credibility declines, the gap between Japan’s and the US’s rates narrows. (Currently, US long-term rates are higher than Japan’s long-term rates)
The US credibility declines → the US dollar is sold → USD/JPY rises (yen appreciation) → the Japan-US rate differential narrows and yen strengthens
This is the kind of relationship.
There are many other pairs of interest rates that have such correlations. Since currency trading cannot be done in a single currency and is done in currency pairs, it is also important to look at differences in creditworthiness between countries, not only the creditworthiness of one country.
4) Long-term interest rates as a predictor of the economy
Long-term yield rising indicates economic recession or political instability, i.e., factors that lower creditworthiness, but this is a bad type of rate rise.
There are two main reasons for rising long-term yields. One is the factors mentioned above that push rates higher. The other is an improvement in the economy—a rise in rates to curb an overheating economy. It is a forward-looking rise in future rates.
Yields also rise due to this kind of economic overheating.
Because there are two kinds of increases—bad and good—it is important to distinguish them.
As described above, there are various ways to view long-term interest rates. Also, depending on the currency pair being traded, the long-term rates to monitor differ. To notice changes, you need regular checks in everyday practice.If you sense a change, think of it as a trading opportunity waiting there.Please keep that in mind.
I record this as often as possible every day, so please refer if you like
